Why Do Corporations Ignore Corrupt Supply Chains? - Pacific Standard

Why Do Corporations Ignore Corrupt Supply Chains?

Because they can.
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One problem with the phrase "corporate social responsibility" is that it doesn't stipulate who the corporation feels responsible to. If corporations' responsibilities lie with the planet, society, and consumers, they should, above all else, eliminate climate change-causing emissions and end unfair labor practices. If these responsibilities extend beyond the planet and society and to their shareholders, this demands a different set of primary objectives.

This disconnect between these two understandings of corporate responsibility is especially evident when it comes to global supply chains. As the world economy has globalized, products are made in increasingly segmented ways. As National Public Radio's Chris Arnold illustrated in an August piece about the future of the North American Free Trade Agreement:

If you're driving in a Ford car, and you go to roll down the window, that little switch you use to put your window up and down - the first components of that start in Asia, they come to a factory in Colorado, then they get shipped to Mexico - Juarez, Mexico - then they come back - as this part gets built - to either the U.S. or Canada. And then the final car might be assembled in Mexico or the United States.

That's a lot to keep track of, and companies must consistently make sure the nodes of their supply chains are on the same page. They do this not only to ensure that quality remains consistent, but also to ensure that labor is treated fairly. But, frequently, profit comes before those considerations, and that means keeping costs down. This can lead to a devaluation of social responsibility when deciding how labor, and the planet as a whole, is treated.

"When you talk about 'sustainability' or 'corporate social responsibility,' that's still somewhat of a buzzword and slogan, rather than the best practices that have been deployed," says Nick Vyas, executive director of the Center for Global Supply Chain Management at University of Southern California's Marshall School of Business. "The best way [for companies] to distance themselves from these issues is to make it the problem of someone else [on the supply chain]."

A recent investigation by The Economist's Intelligence Unit found that nearly four-fifths of companies surveyed believe that their supply chain is "responsible." However, their actions said otherwise.

Of those surveyed, only 23 percent addressed climate change and carbon footprints in their supply chain. Only 22 percent addressed child labor. Only 28 percent made any steps toward gender equality. In fact, as the report details, over the past five years, more than 30 percent of corporations have decelerated their attempts to keep their supply chains socially responsible. One reason for this troubling trend is that, right now, no one's really policing them.

"[Their] focus is to make money, and customers or public are supposed to be protected by contracts or competitive markets that the government is supposed to put in place," says Anat Admati, professor of finance and economics at Stanford Graduate School of Business. "If society doesn't want children to work, then, by the logic of capitalism, the government should put in place laws, and hold them to the laws."

While the writing and passage of legislation can be complex, the resulting rules mean nothing without enforcement. For instance, while China has a statute making it illegal for children younger than 16 years old to work, enforcement is lax enough that many companies don't bother following it. An American company attempting to lower labor costs may take this into consideration when deciding where to produce its goods.

"We have a global system, but not global laws," Admati says. "Some corporations intentionally move to countries where laws are easier on taxes or child labor, because labor is cheaper. Most corporations do not view themselves as having to deal with these things. They just do what the rules allow them to."

When governments don't write sound laws, or have tough enough enforcement, how are corporations kept honest? Traditionally, powerful unions stepped in to protect worker rights through work stoppages, and environmental organizations lobbied for stronger regulations. But unions have been decimated, and the budgets of non-profit advocacy groups are less than what corporations spend on catering for lobbyists. Pressure needed to come from another place, and, for a while, it has.

"There isn't anything new about child labor issues," says Timothy Lytton, associate dean of Center of Law, Health, and Society at Georgia State University College of Law. "What's new is that consumers have become drivers for demands that industrial supply chains be policed."

The Internet has allowed information about global working conditions to reach consumers in near real time, which has made consumer-led boycotts (either loud campaigns or silent purchasing decisions) easier and increased companies' brand sensitivity. "Companies used to think about regulation in terms of what the government is demanding," Lytton says. "They're now worrying about brand value."

But this consumer-driven enforcement of morality only goes so far.

Take the viral story from April concerning a United Airlines passenger being forcibly dragged off a flight. Almost immediately, video of the bloodied passenger made social media rounds, then television news broadcasts, then the next day's newspapers. Unsurprisingly, in the week that followed, stock prices for United fell from $71.50 to $67.75. But in the chaotic news environment we live in, consumers quickly moved on. Take a look at the lone spike for "United Airlines" in Google Trends. By July 13th, three months after the incident, United's stock price had risen back up to $80 a share. (Editor's Note: It has since fallen to $63 per share.)

On November 4th, 2016, after the Nation Institute's Investigative Fund produced a lengthy report showing how Nike mistreats its female workers in Vietnam, the shoe company's stock fell to $49.96. But now, without the company addressing any of the report's concerns, its stock price has stabilized. If company profits weren't affected in the long run, and working conditions haven't improved, what effect did the report really have?

Expecting companies to "do good" on their own is a mistake we've long known. But relying on consumer decisions to hold them accountable is also misguided. When the primary goal is profit, then perhaps drooping sales lead to more responsible supply chains. But maybe, all this advocacy just forces corporations to trim their labor protections and environmental safety measures even more to make up for their losses.

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